Zinc

A member of the base metals family, zinc at room temperature is brittle with a silvery-blue appearance. It’s primarily used in galvanization, which is the process of adding a protective coating to steel or iron in order to protect it from corrosion.

However, zinc alloys such as brass can be used in other materials like musical instruments and hardware.

Given its large role in galvanization, zinc is also a key element in the automotive industry. As such, when following the zinc market it’s important to pay close attention to the economic activity of China, the world’s biggest automaker.

Read on to get an idea of zinc’s supply and demand dynamics, plus how to get in on zinc investing.

Zinc investing: Supply and demand

Though the commodity’s price point has recovered after suffering some rough patches in 2018, demand for zinc has wavered recently after reports of China’s slowing automotive market.

According to Reuters, car sales out of the major nation dropped 14.6 percent this past April compared to the same month in 2018. This was the industry’s 10th consecutive month in the red, as sales were down 5.2 percent in March and 14 percent in February.

However, experts told the Investing News Network (INN) that the outlook for zinc demand is being supported by China’s investment into zinc-intensive infrastructure.

The US Geological Survey’s latest commodities report shows that China is the world’s largest producer of the base metal by a long shot, coming in at 4.3 million metric tons in 2018. While mines are often an important focus point for investors, experts have pointed at zinc smelters as a major driver in the metal’s supply and demand fluctuations.

FocusEconomics economist Javier Colato is one person who has pointed to China’s role in the zinc market. He told INN that a spike in pricing earlier in 2019 stemmed from tightened supply.

“Zinc prices trended upwards through April mainly as a result of supply constraints. Stockpiles of the base metal at London Metal Exchange warehouses fell to their lowest levels in over two decades during this period, while inventories at the Shanghai Futures Exchange also remained historically low,” he said.

“Furthermore, Chinese production remained subdued, largely reflecting stricter environmental regulations faced by smelters, thus accentuating the supply shortage in the market.”

Trade war tensions between the US and its main trading partners, especially China, have also been marked as a key influence on zinc stocks. Experts have noted that sentiment and metal prices have deteriorated on indications of the global economy cooling off.

Zinc investing: How to get involved

Those looking to get into zinc investing can look at futures, exchange-traded funds (ETFs) and stocks. Since zinc is often mined in conjunction with other metals such as lead, it is difficult to find standalone zinc mining companies.

When it comes to zinc futures, it is also important to understand the zinc spot price. Simply put, the zinc spot price is the price at which 1 pound (or another measurement, dependent on the market) of the metal is currently being bought and sold for.

With relation to futures, the spot price comes into play when looking at the greater derivatives market. Futures are an example of derivatives, with the latter being contracts whose value is based on the performance of an underlying entity.

According to InvestingAnswers, by buying futures contracts, one can guarantee the asset’s buy or sell price in the future. This creates a lower-risk opportunity for investors. Given zinc’s sometimes tumultuous performance, this can be an especially desirable route for those curious about the metal.

If one would prefer to invest in zinc mining companies, there are a few notable projects on the rise right now. A major pipeline to watch currently consists of projects either ramping up production or restarting operations, such as MMG’s (HKEX:1208) Dugald River or Heron Resources’ (ASX:HRR) Woodlawn.

As these operations pick up speed, experts like Wood Mackenzie Senior Research Analyst Rory Townsend believe the zinc concentrate market will reap the benefits.

“So what does this new mine supply mean for the concentrate market? We’re expecting sequential years of global concentrate surplus for the next few years. This concentrate surplus is expected to be very large, peaking at over 800,000 tonnes per annum in 2020 and 2021,” Townsend said in a presentation at the Prospectors and Developers Association of Canada convention.